Defense contractors brace for life without supplemental bills

You'd never know from the congressional debate over the Obama administration's fiscal 2010 budget request for the Defense Department that the White House actually wants to increase its budget by about 4 percent, to $533.8 billion. That's because in the convoluted world of defense spending, the Pentagon's budget in recent years has shown little resemblance to what the department actually spends. The White House wants to change that, and defense contractors are bracing for the fallout.

Since 2001, when U.S. forces invaded Afghanistan, Congress has authorized 17 funding bills totaling $882 billion on top of Defense's annual appropriation, according to the Office of Management and Budget. These supplemental bills have funded the costs of military operations in Iraq and Afghanistan, but they've also been padded with money for priorities not related to the wars, such as the F-22 fighter jet, built by Lockheed Martin Corp., which has never been used on the battlefield. Going forward, the White House says it will fund military operations in Iraq and Afghanistan through the regular appropriations process.

So the budget increase administration officials have touted actually portends a significant decrease in defense spending, particularly on some big-ticket weapons programs. Among those the administration is seeking to cancel is the Transformational Satellite Communications System, shared by Lockheed and Boeing Co., which has been valued at anywhere from $14 billion to $25 billion through 2016. Lockheed also would be hit with the cancellation of the presidential helicopter program, whose costs have doubled during the last three years to more than $11 billion.

Cuts in missile defense programs, including Boeing's airborne laser prototype aircraft and Lockheed's Multiple Kill Vehicle, also will hit the two defense behemoths. Likewise, major ship programs, affecting Northrop Grumman Corp. and General Dynamics Corp., would be significantly restructured, along with the Army's central modernization program known as Future Combat Systems, which is managed by Boeing and SAIC.

Defense Secretary Robert Gates expected push back on what he called a "reform budget," and he's getting it. Even before lawmakers received the White House budget request, many protested cuts to favored programs, especially missile defense efforts. It wasn't clear as of late July how significantly Congress would alter the administration's request, but it was clear that Defense spending priorities would have to change.

A central problem for the Pentagon has been figuring out how to pay for the weapons the services want to buy. Even before the depth of the global financial crisis was known, the Air Force calculated it was facing a $20 billion gap between its budget and its plans, and the Army foresaw at least a $30 billion shortfall. The Navy hasn't publicized a figure, but most analysts think it would be in the same ballpark as its sister services.

It's not clear yet whether the Obama administration ultimately will bridge the gap between the services' resources and their plans. The department is undergoing a Quadrennial Defense Review for 2010 that aims to provide the analytical framework for making trade-offs in defense spending priorities, and a number of programs are essentially on hold until that review is completed.

Gates repeatedly has appealed to lawmakers to look beyond their parochial interests and view the Defense budget as part of a broader strategic plan. "We have to be prepared for the wars we are most likely to fight-not just the wars we have been traditionally best-suited to fight, or threats we conjure up from potential adversaries who, in the real world, also have finite resources," he told the House Armed Services Committee in May.

Click here for the top 100 defense contractors.

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